What is an inside bar candlestick pattern?
An inside bar is two candlesticks, the first one is called the mother candle, it is big and large, and the second one is smaller and it is located inside of the mother bar.
The illustration above shows inside bars at tops and at bottoms, as you can see, the second small bar is completely contained by the first one which is the opposite of the engulfing bar pattern.
The inside bar is seen as a reversal pattern, because it indicates that the market trend is likely to change especially when it is located at tops or bottoms.
It is also considered as a continuation signal in strong trending markets.
According to Thomas Bulkowski, a successful investor, and trader with over thirty years of market experience:
A bearish inside bar pattern in a bull market can indicates a bearish reversal in about 65% of the time.
And in a bull market, it represents a bullish continuation signal in about 52% of the time.
And a bullish abandoned baby as he call it, is considered a bullish reversal pattern 70% of the time in bull markets, and 55% in bear markets
The psychology behind the pattern formation
The inside bar formation indicates a period of consolidation, in case of a bullish trend, it reflects that the bulls are not buying any further on the second day, it is represented by a small black candle on the second day, after a strong uptrend.
And in case of a bearish trend, it means that sellers are not in control of the market any more, it is reflected by a small white candle after a strong downtrend.
Your understanding of the psychology behind this pattern will help you better identify major turning points in the market, and time correctly your entry and exit.